Mandelson, now European commissioner for trade, is to receive a peerage and will serve in the House of Lords, The Times of London reported.

Brown, Mandelson and former Prime Minister Tony Blair were once close allies. But Mandelson backed Blair for the Labor Party leadership in 1993, setting off a 15-year feud with Brown. The appointment is expected to shore up Brown's relationship with other Blair allies.

His return to the Cabinet was welcomed by business leaders, while union officials refused comment. John McDonnell, a leader in the left wing of the Labor Party, called it "an extraordinary step backwards into the worst elements of the Blair era."

Business Secretary John Hutton is moving up to defense secretary, replacing Des Browne.

Geoff Hoon, the chief whip, is joining the Cabinet as transport secretary, replacing Ruth Kelly, who resigned last week. Immigration Minister Liam Byrne becomes Cabinet office minister.